„… OUR INNOVATIVE PRODUCT SOLUTIONS ARE HIGHLY VALUED IN THE MARKET …“

Interview with the board of directors

In conversation with the Board of Directors of the POLYTEC GROUP, Markus Huemer (CEO/COO),
Peter Bernscher (Deputy Chairman of the Board/CCO) and Markus Mühlböck (CFO), about a difficult year marked by multiple challenges, including operational issues, cost increases and personnel bottlenecks, but also by another increase in revenue and strong order intake.

Mr Huemer, after the strong order intake of the previous years, the POLYTEC GROUP carried out many new production launches in 2023. However, this is not reflected in the results yet. Why?

Markus Huemer: Because we were faced with significant negative influences on many fronts: First and foremost, some series launches did not go as smoothly as expected and consequently led to noticeable operational upheavals. This primarily affected the plants in Lohne and Weierbach. At the same time, our existing business fell short of expectations despite volume increases, most notably in the areas of e-mobility and logistics. On top of that, we were confronted with cost increases, which – as in the past – we were only able to pass on with a delay, and only in part. Under these difficult conditions, we still managed to achieve an increase in revenue of roughly 6 percent; this was, however, below budget. Unfortunately EBIT turned negative as a result of the above-mentioned difficulties and amounted to just under EUR –7 million.

What were the main difficulties you encountered in 2023 – and is there an end in sight?

Markus Huemer: In addition to the fact that volume fell short of expectations, the main problem were the operational difficulties we had with some new production starts. Thanks to our successful order intake in the past years, we had an enormous number of new launches in 2023, characterised by a changing product portfolio and increased technological demands. In total, we had about 100 new projects, for which roughly 600 tools are used, but unfortunately some of them did not have the level of series maturity that would have been necessary for a smooth production start. The consequence was intensive “firefighting” to get the projects on track. Of course, this ties up resources and also causes significant additional expenses.

In part, this was also due to the conversion of our organisation to central functions, which we implemented in recent years. Although we succeeded in establishing group-wide standards this way, we may have overshot the target here and there. In addition, there was a bottleneck in plant capacity, as the delivery times for machines increased to up to 18 months in 2023. As a result, we were unable to implement necessary investments in time and our responsiveness was slowed significantly. Another problem was the lack of available employees, as it is becoming increasingly difficult to find suitable skilled workers. Consequently, we frequently have to use temporary workers, often at very short notice, which represents a major challenge, not only in organisational and technical terms, but also in economic terms.

And what does the situation in Lohne and Weierbach currently look like?

Markus Huemer: Of course we immediately took countermeasures at all levels. In Lohne, where only certain new products were affected by start-up difficulties, we are already on track. The variances have now been cut by half, and I expect the situation to stabilise further in the next few months. The product portfolio at the Weierbach plant has become significantly more fragmented and more complex following the main customer’s strategic transformation. This impacts the central manufacturing process and, consequently, the entire plant. Here, we still have many challenges ahead of us.

But we also have to look at the proportions here: we are talking about two plants out of a total of 21 – at all other locations, things are stable by and large. Moreover, we have proven a hundred times over in the past that we know how to handle ramp-ups of series production. In 2023, there was simply a very unlucky coincidence of multiple factors.

The internal organisational measures of the past years were intended to make the POLYTEC GROUP more efficient overall and therefore more powerful. Is it foreseeable when they will have an impact on the results?

Markus Huemer: Given the experience of the past year, we will now make some adjustments and have already initiated appropriate measures. In particular, we have to validate whether we should scale back on the level of centralisation in order to become more powerful operationally. I am confident that we will already see improvements in our 2024 results.

In the recent past, disrupted supply chains and a sharp increase in raw material and energy prices caused massive problems in many industries. What does the situation currently look like for POLYTEC?

Markus Huemer: We have not seen any major disruptions of our supply chains for some time now, with the exception of the previously mentioned machinery. However, there are occasional insolvencies of suppliers. We are monitoring this situation very closely, of course. As far as prices are concerned, there is currently a downward trend for material and energy prices; prices for machinery are still high though.

In late 2023, you negotiated price adjustments with your customers in view of the massive cost increases. How did you manage to do that?

Peter Bernscher:We had already negotiated to pass on cost increases for materials, energy and purchased parts – which account for about half of our operating expenses – to our customers in the past years. However, the operational implementation was partially delayed due to systemic hurdles. That also happened in 2023. In the past, increases in our personnel, material and financing costs were not the subject of negotiations with customers in the automotive industry, not least due to their predictability. But now they are – because they have led to substantial additional costs, driven by strong inflation. After intense negotiations at the end of 2023, we will be compensated for significant portions of the costs in 2024. This not only helps us economically, but is ultimately also a confirmation of our good position in the industry and the acceptance among customers. Our innovative product solutions are consistently highly valued in the market.

What about the call-offs by your customers? Are they still volatile or have they become more consistent?

Peter Bernscher:Short-term volatility has declined significantly, but conversely the market has become more difficult to assess in its medium to long-term development and is likely to stagnate for the foreseeable future, at least in Europe. While European car production was up 12 percent in 2023, it is expected to decline by 4 percent next year and continue at this level in the following years, which is, by the way, still 20 percent below the level of 2019.

At the same time, we see major shifts between products and platforms: a German premium manufacturer, for example, will significantly reduce their volume of smaller series. Moreover, e-mobility is developing less dynamically than expected.

Nevertheless we are optimistic, as we managed to establish a good position in the supplier market over the past years for both vehicles with combustion engines and also electric vehicles. Wherever the journey may take us, we are on board and can compensate for reductions in one segment by growth in another. The good order intake of the past years has proven that impressively. On this basis, we continue to expect revenue growth in a stagnating market in the powertrain segment (incl. battery applications).

Which investment strategy do you pursue in view of growing difficulties in long-term forecasting and which effects does that have on your financing?

Markus Mühlböck:Our investment strategy is very prudent – as a matter of principle, we make major investments only in connection with concrete customer projects. In 2024, for example, we have extensive investments coming up in England because the production and service volume for two major customers is growing significantly. Here, two new assembly and sequencing centres will be built and the existing plant in Telford will be extended.

Our investments are usually financed in the long term, in line with the duration of the respective projects, but in some cases also from current cash flow and via sale-and-lease-back transactions. In the past years, our investment volume was lower than annual depreciation and amortisation; in 2024 it will be slightly higher at around EUR 40 million, thanks to the previously mentioned project in England.

In all of this, the topic of sustainability is also an important focus. We use new investments to become more future-proof, resource-conserving and energy-efficient.

The situation in the labour market remains tense. How are you dealing with that and which measures are you taking to recruit and retain highly qualified employees?

Peter Bernscher:We continuously work on positioning POLYTEC as an attractive employer in the labour market and are taking a whole bundle of initiatives to do so. In addition to employer branding, we also attach great importance to employee retention. The aim is to make POLYTEC interesting in the long term and to distinguish it from other employers. We are creating an environment in which people can develop – in terms of both their career and knowledge growth. We also offer attractive income opportunities. What is particularly important in all of this: the labour market is changing and we have to keep pace. Therefore, we specifically respond to the changed requirements and expectations that especially young, qualified people have – for example teleworking, part-time models, flexible working hours, etc. To get in contact with young talents at an early stage, we collaborate with universities on a project basis and are represented at job trade fairs of all kinds. At the same time, we focus on high-quality apprentice training so that we can also rely on qualified skilled workers.

Since 2020, you have pursued an adapted market development strategy with the POLYTEC SOLUTION FORCE, where you bundle the technological expertise of the entire group. This led to a record level of new orders in 2022. What about new orders in 2023?

Peter Bernscher: The order volume in 2023 was at a similarly high level as in 2022 and therefore very positive – even though the awarding of some important projects was postponed to the year 2024. Therefore, 2024 could be even better again. The POLYTEC SOLUTION FORCE is proving itself across the board – the principle is right.

Specifically, we were able to strengthen our market presence in the Agricultural segment with two new customers for exterior components in 2023. We also received major orders for spoilers and add-on component systems in the Painted Exteriors segment. In addition, we won two contracts in the area of thermal management for e-mobility. Here, we will supply tubing including valve technology for the cooling and heating cycles and are thus taking a leap into a completely new product segment. Likewise, we won a battery housing contract for a premium customer. Against the backdrop of the very positive incoming orders in the Painted Exteriors segment in England, we are currently expanding our local capacity significantly, as Markus Mühlböck mentioned before. We are aiming to expand our current service offer, above all for two premium customers, to include injection moulding, assembly and sequencing while at the same time significantly increasing the number of units produced. To this end, we will operate two new assembly and sequencing centres. At the same time, an expansion investment will be necessary at the Telford plant. Overall, this could help us to more than double our revenue in England in the future – depending on the success of the respective vehicle models of course.

You also intend to uncouple your services from the classic automotive industry to a greater extent with the POLYTEC SOLUTION FORCE. Is this plan working out and in which product segments do you see the greatest potential for POLYTEC in this context?

Peter Bernscher: In the Smart Plastics segment, which comprises all our non-automotive activities, orders are also developing positively. Our long-term objective, i.e., to generate 30 percent of our total revenue in this market segment, thus remains intact. Products for sustainable transport logistics, where we score with reusability and recyclability, are one focus area in this context. The second focus area – products for sustainable energy supply – encompasses components for storage systems, for e-mobility charging systems as well as for heat pumps. Not only was a blanket order for logistics containers for a key customer extended in 2023, but production volume is also expected to increase in 2024. In addition, we won a new order for the supply of reusable and recyclable plant trays. In the area of sustainable energy supply we developed a number of sophisticated products, whose success, however, depends on our customers’ market penetration. If and how we can also scale these products to other customers is therefore a question we will deal with intensively in 2024.

And what are the current focal points in innovation?

Peter Bernscher: The central focus areas are definitely different solutions around e-mobility, from battery housings to the underbody, where such diverse topics as aerodynamics, safety, lightweight construction or shielding from electromagnetic radiation play a role. In most cases, the aim is still to substitute metal solutions with plastic solutions. Take our car seat cushion frames, for example, where we can replace steel-wire solutions with pure plastic solutions. These are lighter and more efficient and allow for increased functional integration. The same applies to battery housings, which are currently made of metal in 85 percent of the cases. New materials and the integration of multiple functions are consistently the levers for significantly higher added value with a comparable product.

Chinese electric car manufacturers are currently stepping up their sales activities and production in Europe – threat or opportunity for the POLYTEC GROUP?

Peter Bernscher:I primarily see this as an opportunity to supply these OEMs as soon as they produce in Europe. China is the global market leader when it comes to e-mobility; in 2022, 60 percent of all hybrid and e-models worldwide were produced by Chinese manufacturers. In addition to the leading position in terms of units, China is also at eye level with its competitors technologically. It would be extremely attractive for us to supply European plants of Chinese producers. We have the suitable products and technologies as well as the production expertise to do so.

You are working intensively on the implementation and further development of your sustainability strategy. Which milestones did you achieve in 2023 and which areas will you focus on in 2024?

Markus Huemer: Expanding our photovoltaic capacities is one important focal point, which we will continue to pursue. At the same time, energy-saving initiatives are in place at all plants – our processes are very energy-intensive, which is why we are trying to reduce energy consumption for vapour generation, compressed air and heating wherever possible. By the way, we now cover a substantial part of our energy requirements with renewable energy.

The substitution of natural gas is another topic we are working on intensively. Here, there are multiple different technical solutions, also for the high-temperature segment. But we assume that a lot will happen here in terms of technology in the coming years. At any rate, we are closely monitoring the development and take initiatives in those areas in which we are investing anyway. In 2023, our gas consumption was already more than 30 percent lower than in 2018.

Peter Bernscher: At the same time, we are continuously working on making our products more sustainable through targeted innovation. We are focusing on minimising our carbon footprint, on increasing the share of recyclable raw materials in our portfolio and on enhancing the service and maintenance friendliness of our products. This is based on a life cycle assessment of every single product. In doing so, we meet a core requirement of our customers, who are particularly dedicated to reducing the carbon footprint and increasing the use of recyclates and renewable raw materials.

Will you remain true to your goal to make production completely carbon-neutral by 2035? What are the chances of achieving this goal?

Markus Huemer:Yes, this goal remains unchanged, and we continue to work hard to achieve it. However, in doing so, we are also dependent on the availability of renewable energies and an affordable substitution for natural gas.

Your share has continuously lost in value over the last few years. Why should investors nevertheless invest in our share?

Markus Mühlböck:Because it offers enormous potential. We have a future-oriented product portfolio, a good market position with high acceptance among customers and an unparalleled price-to-book ratio: our market capitalisation of EUR 75 million is offset by EUR 221 million of equity. Our non-current assets of EUR 242 million comprise almost exclusively physical assets in the form of buildings and machinery, and we have not capitalised any goodwill. We also receive signals from the market increasingly frequently that investors are recognising our potential. However, I certainly understand why the share price is what it is at present. After all, the market also expects certain results.

The interest rate landscape has changed significantly worldwide over the last two years. Which strategy do you pursue against this backdrop when it comes to (re-)financing?

Markus Mühlböck: We were recently able to refinance a large part of our non-current liabilities – this also confirms the trust in POLYTEC. After all, the framework conditions were not exactly easy – from the weak 2023 results to the subdued outlook for the industry overall. We are highly satisfied that we were able to negotiate acceptable refinancing terms and that we succeeded in winning even new banks for the consortium around our valued house bank. We opted for a variable interest rate, which allows us to benefit from the expected decrease in interest rates. In addition to the banks, the Huemer family as the main shareholder also contributed to the refinancing.

In closing, what is your outlook for 2024 and beyond?

Markus Huemer:From today’s perspective, we expect planned revenues in the range of EUR 660 million to EUR 710 million and aim for an EBIT margin of roughly 2 to 3 percent. Overall, we look to the future with optimism. Because the market continues to value us very highly.